Calculating The Intrinsic Value Of Shenzhen Comix Group Co., Ltd. (SZSE:002301)

Key Insights

• The projected fair value for Shenzhen Comix Group is CN¥5.31 based on 2 Stage Free Cash Flow to Equity
• Shenzhen Comix Group's CN¥4.89 share price indicates it is trading at similar levels as its fair value estimate
• Analyst price target for 2301 is CN¥8.50, which is 60% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Shenzhen Comix Group Co., Ltd. (SZSE:002301) by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for Shenzhen Comix Group

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥295.8m	CN¥265.8m	CN¥249.2m	CN¥240.5m	CN¥236.8m	CN¥236.3m	CN¥238.0m	CN¥241.4m	CN¥245.8m	CN¥251.2m
Growth Rate Estimate Source	Est @ -15.78%	Est @ -10.17%	Est @ -6.23%	Est @ -3.48%	Est @ -1.56%	Est @ -0.21%	Est @ 0.74%	Est @ 1.40%	Est @ 1.86%	Est @ 2.18%
Present Value (CN¥, Millions) Discounted @ 8.4%	CN¥273	CN¥226	CN¥196	CN¥174	CN¥158	CN¥146	CN¥135	CN¥126	CN¥119	CN¥112

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥1.7b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥251m× (1 + 2.9%) ÷ (8.4%– 2.9%) = CN¥4.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥4.7b÷ ( 1 + 8.4%)¹⁰= CN¥2.1b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CN¥3.8b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CN¥4.9, the company appears about fair value at a 7.9% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Shenzhen Comix Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.4%, which is based on a levered beta of 0.972. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Shenzhen Comix Group

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Shenzhen Comix Group, there are three relevant factors you should assess:

1. Risks: Be aware that Shenzhen Comix Group is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does 002301's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the SZSE every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.